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D.C. Circuit affirms decision striking down tax return preparer regs.

The IRS’s attempt to regulate unenrolled tax return preparers was
dealt another blow on Tuesday as the D.C. Circuit Court of Appeals
held that the agency exceeded its statutory authority when it issued
regulations imposing various requirements on tax return preparers (Loving,
No. 13-5061 (D.C. Cir. 2/11/14), aff’g No. 1:12-cv-00385 (D.D.C.
1/18/13)). In the decision, the appeals court held that Section 330,
which authorizes the IRS “to regulate the practice of representatives
of persons before the Department of the Treasury” does not permit the
IRS to impose its rules on the estimated 600,000 to 700,000 unenrolled
tax return preparers or allow it to require them to pass a
certification test, pay a fee, and take continuing education courses.

The lawsuit was brought by three unenrolled tax return preparers, who
argued that the IRS has no authority to regulate the preparation of
tax returns. The IRS issued final regulations in 2011 (T.D. 9527)
making unenrolled return preparers (i.e., return preparers who are not
CPAs, attorneys, or enrolled agents) subject to Circular 230,
Regulations Governing Practice Before the Internal Revenue
Service (31 C.F.R. Part 10), for the first time and requiring
them to pass a qualifying exam, pay an annual fee, and take 15 hours
of continuing education courses each year. The IRS based its authority
to regulate tax return preparers on 31 U.S.C. Section 330, which
allows the IRS to regulate “representatives” who “practice” before it.

The plaintiffs sued in the federal district court for the District of
Columbia, which held that the IRS’s registered tax return preparer
program exceeds its authority under Section 330 and enjoined it from
enforcing the regulations. The IRS appealed, and the D.C. Circuit
court affirmed the lower court decision.

The appeals court explained that it had six reasons for invalidating
the regulations. First, the term “representatives” in Section 330
meant agents who had authority to bind others, which tax return
preparers clearly do not do—they do not have the legal authority to
act on a taxpayer’s behalf without being specifically authorized by a
taxpayer to do so. Second, the word “practice” does not mean, as the
IRS asserts, preparing and signing tax returns, but instead refers to
traditional adversarial proceedings before a court or agency. The
language in Section 330(a)(2)(D), which refers to the requirement that
representatives demonstrate competency to advise and assist persons in
presenting their cases, further supports this interpretation, the
court said.

The court next examined the original language of Section 330 (enacted
in 1884), referring to “agents, attorneys, and others representing
claimants,” which clearly did not encompass tax return preparers. Once
the statute was amended to simplify the language by referring simply
to representatives, there was no indication that Congress meant to
change to whom the law applied.

The fourth reason involved the statutory provisions that Congress has
added to the Code to regulate return preparers, among them Secs. 6694,
6695, and 6713. The court found that interpreting Section 330 as the
IRS suggested would “effectively gut Congress’s carefully articulated
existing system for regulating tax-return preparers” (slip op. at
13).

The very broad nature and scope of the authority the IRS is claiming
underlay the court’s fifth reason for overturning the program. Under
the IRS’s interpretation, it is empowered to regulate for the first
time hundreds of thousands of tax return preparers in the
“multi-billion dollar” tax return preparation industry; nothing in the
statute’s history or text can support such a vast undertaking. The
sixth reason is somewhat related to the fifth—in the many years since
Section 330 was enacted, the IRS apparently did not think that it had
the authority to regulate preparers before it did so in 2011.

In affirming the lower court’s decision, the appeals court explained
that the regulatory scheme failed both parts of the test from
Chevron U.S.A. Inc. v. Natural Resources Defense Council,
467 U.S. 837 (1984), that the Supreme Court applies to agency
interpretations of statutes because the rule is foreclosed by the
statute, and the IRS’s interpretation was unreasonable in light of the
statute’s text, history, structure, and context.

TAX NEWS

President Barack Obama signed legislation that retroactively extended more than 50 expired tax provisions for 2014, allowing taxpayers to take advantage of a host of tax incentives during this filing season.

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